2. Fiscal Policy
• Def. Government decisions on spending
and taxation that are intended to improve
or maintain the economy.
• Because the government is so large and
has such an impact on business, the
decisions it makes has a HUGE influence
on the economy.
3. Who makes Fiscal Policy?
• Congress and the President make fiscal
policy through the federal budget.
• The Federal Reserve (another government
agency) DOES NOT make fiscal policy.
We will discuss the Federal Reserve next
class.
4. What is the Federal Budget?
• The Federal budget is a written document
that indicates the amount of money the
government expects to receive for a
certain year and authorizes the amount of
money the government can spend that
year.
• Every Fiscal Year (a 12 month period, not
necessarily from Jan. to Dec.) the
government makes a new budget. It may
add to it through supplementary budgets
from time to time.
5. Fiscal Policy and the Economy
• The total level of government spending
can be changed to help increase or
decrease the output of the economy
• Expansionary Policies: Policies that try to
increase the output of the economy
• Contractionary Policies: Policies that try to
decrease the output of the economy
6. Expansionary Policies
• During a contraction or recession, the
government can do two things:
1. Decrease Taxes
Or
2. Increase Spending
7. Decreasing Taxes
1. Gives people more money to spend
2. More money = more demand
3. More demand = more production
4. More production = more jobs
5. More jobs = more demand etc. etc.
8. Increase Spending
1. Increases demand for goods
2. More demand = more production
3. More production = more jobs
4. More jobs = more demand etc. etc.
9. Who favors which policy
• Decreasing Taxes
• Favored by
Republicans
Let people decide what
to spend their money
on and let those who
earned the money
benefit from it.
• Increase Spending
• Favored by
Democrats
Government should
spend to redistribute
wealth to the poor,
rather than give the
rich a tax cut
10. Contractionary Policies
• During a period of excessive inflation
(during a period of expansion), the
government can do two things:
1. Increase Taxes
Or
2. Decrease Spending
11. Increase Taxes
1. People have less money to spend
2. Less money = less demand
3. Less demand = lower inflation
12. Decrease Spending
1. Less money in economy
2. Less money = less demand
3. Less demand = lower inflation
13. Who favors which policy?
Trick Question! Neither party favors
Contractionary Fiscal Policies!!!
This is one of the problems with Fiscal
Policy
14. Problem with Fiscal Policy
1. It is unpopular to raise taxes or cut
government spending. So, elected
officials worried about re-election rarely
do either.
Ex. In 1984, Walter Mondale ran for
president saying a slight tax increase
would help equalize the U.S. economy.
Ronald Regan defeated him in one of the
biggest landslides in U.S. history!
15. Problems with Fiscal Policy
2. If the government cuts taxes, they have
less money to spend or they go into debt.
The federal debt is in the trillions of dollars,
so the government has to borrow money
by selling bonds. These bonds have to
be paid back with interest, costing the
government more money!
